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Insurance Law Report: December 2015

January 06, 2016

Insurance Law Report focuses on developments in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

Below are the articles for the December issue. To view, click on the appropriate title and you will be brought to the full version of the article below.

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Texas Supreme Court Answers Certified Questions on “Your Product” and “Impaired Property” Exclusions
The Texas Supreme Court recently answered certified questions from the U.S. Fifth Circuit Court of Appeals arising from an insured’s claims that its liability for a refinery owner’s replacement costs and downtime damages are covered by its CGL policy. U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 2015 WL 7792557 (Tex. Dec. 4, 2015).

The insured supplied flanges for use in constructing refinery processing units. The flanges were welded to piping and then covered with a coating and insulation. However, the flanges leaked and had to be replaced, resulting in delayed operation of the units for several weeks. The refinery sued the insured for the cost of replacing the flanges and for damages for the loss of use of the units. The insured settled with the refinery and then sought indemnification for its CGL insurer.  

The insurer denied coverage, and the insured sued it to determine its rights under the policy. The federal district court granted summary judgment in favor of the insurer. On appeal, the Fifth Circuit certified to the Texas Supreme Court four questions about the meaning of “physical injury” and “replacement” in the CGL policy:

  1. In the “your product” and “impaired property” exclusions, are the terms “physical injury” and/or “replacement” ambiguous?
  2. If yes as to either, are the aforementioned interpretations offered by the insured reasonable and thus, must be applied pursuant to Texas law?
  3. If the above question 1 is answered in the negative as to “physical injury,” does “physical injury” occur to the third party’s product that is irreversibly attached to the insured’s product at the moment of incorporation of the insured’s defective product or does “physical injury” only occur to the third party’s product when there is an alteration in the color, shape, or appearance of the third party’s product due to the insured’s defective product that is irreversibly attached?
  4. If the above question 1 is answered in the negative as to “replacement,” does “replacement” of the insured’s defective product irreversibly attached to a third party’s product include the removal or destruction of the third party’s product?

The Texas Supreme Court explained that all damages for which the insured claimed coverage arose out of the defective flanges, and thus exclusions for damages to “your product” and “impaired property” of the policy apply. The policy excluded damage to property, or the loss of its use, if the property was not physically injured or if it was restored to use by replacement of the flanges. Thus, the Texas Supreme Court noted, the existence and extent of coverage thus depended on whether the refinery’s property was 1) physically injured or 2) restored to use by replacing the flanges. The insured argued the refinery’s property was physically injured by the installation of the flanges and also during the replacement process. 

In response to the Fifth Circuit’s certified questions, the Texas Supreme Court held that the terms “physical injury” or “replacement” were not ambiguous as incorporated into the “your product,” or “impaired property” exclusions. It found that the installation of the faulty flanges alone did not physically injure the units. However, the Supreme Court found that the refinery processing units were physically injured in the process of replacing the flanges and that repair costs and damages for the downtime were “property damage” covered unless exclusion m. applied.

The Supreme Court concluded that the units were restored to use by replacing the flanges and were therefore impaired property to which exclusion m. would apply, but that insulation and gaskets destroyed in the process were not restored to use — they were replaced — and therefore did not constitute impaired property to which exclusion m. applied. 
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Texas Supreme Court to Address Availability of Insurance Code Penalties Absent Showing of Independent Harm
The U.S. Fifth Circuit Court of Appeals certified to the Texas Supreme Court the question of whether an insurer that wrongfully denies coverage may be liable for Texas Insurance Code penalties where an insured has not shown independent harm. In re Deepwater Horizon, 807 F.3d 689 (5th Cir. 2015), certified question accepted (Dec. 4, 2015).

The insured manufactured a blowout preventer on a well and sought coverage from its insurers to help cover costs related to its settlement with the well owner after a spill. One excess insurer objected to the settlement and refused to offer its policy limits on the basis that the settlement waived its subrogation rights against the owner. The excess insurer also argued its obligation to pay had not yet been triggered based on the policy’s “other insurance” clause. The insured sued the excess insurer for breach of contract and for violations of the Texas Insurance Code. On cross-motions for summary judgment, the district court granted summary judgment to the insured on its breach of contract action, but granted judgment in favor of the excess insurer on the Texas Insurance Code claims and later denied the insured’s request for attorneys’ fees on the basis that the insured had not established independent harm to entitle it to penalties. The insured appealed the district court’s judgment against it on its claim under the Texas Insurance Code and on its claim for attorneys’ fees. The excess insurer cross-appealed the district court’s judgment in favor of the insured on its breach of contract claim.

The Fifth Circuit affirmed the district court’s grant of summary judgment to the insured on its breach of contract claims. The Fifth Circuit found that the “other insurance” clause did not permit the excess insurer to withhold policy benefits. The Fifth Circuit did not reach whether the insured’s settlement violated the subrogation clause because it found the excess insurer breached the contract by wrongfully denying coverage, thereby waiving its rights under the subrogation clause before the insured settled. The Fifth Circuit reversed the district court’s denial of the insured’s motion for attorneys’ fees and remanded for a determination of the proper amount of those fees, but certified the following question to the Texas Supreme Court: “Whether, to maintain a cause of action under Chapter 541 of the Texas Insurance Code against an insurer that wrongfully withheld policy benefits, an insured must allege and prove an injury independent from the denied policy benefits?” The Texas Supreme Court has accepted the certified question.
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Alabama Supreme Court Finds Duty to Defend Allegations of Failure to Use Reasonable Care in Transporting Medical-Imaging Device
The Alabama Supreme Court upheld a district court’s finding that an insurer had a duty to defend under a CGL policy against claims arising from the loss of a medical-imaging device damaged during transport by the insured. Mid-Continent Cas. Co. v. Advantage Med. Elecs., LLC, 2015 WL 6828722 (Ala. Nov. 6, 2015).

The insured was hired to inspect and transport a used CT scanner. A portion of the device was damaged while being lowered into a truck by a winch attached to a tow truck. The insured was sued for the failure to use reasonable care in moving the device. Its insurer denied coverage citing the contractual liability exclusion, the auto exclusion, the exclusion for personal property in the insured’s “care, custody, or control” and the “your work” exclusion. The parties filed cross-motions for summary judgment on the duty to defend. The court found a duty to defend.

The Alabama Supreme Court affirmed. The Court found that the “auto” exclusion did not apply because the accident did not arise out of the “use” of the truck. The Court reasoned that the device became damaged while being lowered by a mechanical device, and therefore the incident fell within an exception to the definition of “loading and unloading” which otherwise would constitute “use.” The Court also found that the district court did not err in failing to apply the “care, custody, or control” exclusion because the complaint did not allege that the insured exercised the type of exclusive possessory control over the device required, noting the tow truck company’s involvement. As for the “your work” exclusion, the Court considered that while the complaint alleged physical damage to the entire device, only one portion of it was being moved at the time of the incident. Thus, the Supreme Court found, even if the mere movement of property constituted work on the device, to the extent the parts of the device other than the portion being moved were damaged, the ”your work” exclusion would not apply as to them.
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Kentucky Supreme Court Holds Injury to Employee Exclusion Does Not Apply To Permissive User of Insured Auto
The Kentucky Supreme Court recently held that an injury to employee exclusion does not bar coverage for a permissive user of an insured auto sued for the employee’s death. Tower Ins. Co. of New York v. Horn, 472 S.W.3d 172 (Ky. 2015).

An employee fell from a company truck and was fatally injured. The driver of the truck was a friend of management who was driving the truck while the company was short-staffed. He was not an employee and did not receive compensation. When a wrongful death action was filed against the driver for the employee’s death, the driver asserted that the company’s auto policy covered the claim against him. The insurer intervened seeking a declaration of rights as to its obligation to defend and indemnify the driver.

The trial court granted summary judgment for the insurer, finding that while the driver was a permissive user and thus an insured under the policy, the policy’s exclusion that excluded coverage for bodily injury to an employee of the insured precluded coverage for the employee’s death. The trial court did not find that the policy’s severability clause negated the exclusion. The driver appealed.

The court of appeals reversed. While the court of appeals agreed the driver was an insured, it found that the severability clause applied separately to each insured, thereby rendering the exclusion ineffective as to the driver who was not the employer of the employee. The Kentucky Supreme Court affirmed, finding that exclusion did not apply to the driver/permissive user.
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Tenth Circuit Holds Excess Insurer has No Duty Under Oklahoma Law to Defend or Indemnify Insured Whose Primary Insurer Goes Bankrupt
The U.S. Tenth Circuit Court of Appeals upheld a district court’s judgment in favor of several excess insurers finding that no duty exists under Oklahoma law for excess insurers to defend or indemnify an insured whose primary insurer is insolvent. Canal Ins. v. Montello, Inc., 2015 WL 7597429 (10th Cir. Nov. 27, 2015).

Several excess insurers filed a declaratory judgment action seeking a determination that no coverage existed where an insured’s primary insurer was insolvent. The district court ruled that the excess insurers had no duty to drop down and defend or indemnify the insured. Under Oklahoma law, a primary insurer has the primary duty to defend and indemnify the insured unless a policy provides otherwise. The excess policies provided that “[t]he company will indemnify the insured for all sums which the insured shall become legally obligated to pay as damages and expenses, all as hereinafter defined as included within the term ultimate net loss.” The insured argued that as a result of the primary insurer’s insolvency it had incurred expenses and would become legally obligated to pay damages. The Tenth Circuit found the excess policies provided a defense only when “(1) the defense involves a claim for which the [excess insurer] Policies provide coverage; and (2) there is no underlying insurer obligated to defend,” and held an excess insurer’s duty to defend simply does not arise as a result of the primary insurer’s inability to defend.

The Tenth Circuit further found that the excess policies were triggered only where the primary insurer’s limits are reduced by “payment of loss” and that insolvency or the primary insurer’s inability to pay was not a “payment of loss.” The policies also cover “risks that the underlying policy does not cover,” and the Tenth Circuit held that the primary insurance must be inapplicable, not just unavailable.
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Fifth Circuit Holds Excess Coverage Not Triggered by settlement Below Primary Limits
The U.S. Fifth Circuit Court of Appeals has held that an excess insurer’s policy obligations did not attach where the primary insurer settled claims against its insured for less than policy limits. Martin Resource Mgmt. Corp. v. Axis Ins. Co., 803 F.3d 766 (5th Cir. 2015).

The insured sought recovery from its primary and excess insurers for losses suffered and settled with its primary insurer for less than primary limits. It argued that if it paid the difference between primary limits and the settlement amount, the excess policy attachment point is reached. The excess insurer moved for summary judgment arguing that the terms of the excess policy calling for “actual payment under such Underlying Insurance” required the primary insurer (and no one else) to actually pay the primary limits. Summary judgment was granted.

The Fifth Circuit affirmed, holding that the excess policy unambiguously precluded exhaustion by below-limit settlement and that such exhaustion must be by the primary insurer. It further found that other provisions of the excess policy confirm that it unambiguously bars the insured from exhausting the primary policy by paying the difference between the underlying limit of liability and a below-limit settlement.
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Eleventh Circuit Finds Insurer Did Not Act in Bad Faith Under Florida Law by Refusing to Enter Into a Settlement Agreement in Excess of Policy Limits
The U.S. Eleventh Circuit Court of Appeals held that an insurer has no duty to enter into a consent judgment in excess of its policy limits. Kropilak v. 21st Century Ins. Co., 2015 806 F.3d 1062 (11th Cir. 2015).

An insured was the at-fault driver in an automobile accident, resulting in injury to the other driver. The insured’s auto insurer immediately tendered its policy limits. Over a year later, the claimant requested that the insurer enter into a consent judgment against the insured in excess of the policy limits, which it did not accept. After a jury returned a verdict in excess of the policy limits, the insured and the claimant entered into a consent judgment and the claimant initiated a bad faith action against the insurer. The claimant argued, among other things, that the insurer acted in bad faith by refusing to enter into the consent judgment in excess of policy limits. The insurer moved for protective orders barring the depositions of the insurer’s representatives regarding the claimant’s consent judgment offer. The court granted the insurer’s motions for protective orders. The insured and the claimant appealed.

The Eleventh Circuit, applying Florida law, affirmed. It held that the insurer had no duty to agree to a consent judgment in excess of the policy limits. The Eleventh Circuit found that the district court correctly precluded the introduction of evidence regarding the claimant’s offer for the insurer to enter into a consent judgment.
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Fifth Circuit Holds No Breach of Fiduciary Duty Under Mississippi Law For Failure to Settle Claim Where Claimant Makes No Offer
The U.S. Fifth Circuit Court of Appeals affirmed a district court’s grant of summary judgment in favor of an insurer on an insured’s claim for breach of fiduciary duty arising from alleged mishandling of a settlement of an underlying action against the insured which resulted in an excess verdict. Hemphill v. State Farm Mut. Auto Ins. Co., 805 F.3d 535 (5th Cir. 2015).

An insured was sued by a third party after the third party was injured in a motor vehicle accident. The insured had a suspended driver’s license and initially claimed his girlfriend was driving. He later admitted to driving and, based on this information, the insurer’s investigator contacted the third party and, according to the insurer, the third party was advised of the policy limits. The insurer made several offers for less than policy limits as medical bills were obtained, but the third party rejected the offers. Two years later, a jury rendered an excess verdict against the insured. The insurer subsequently paid policy limits, and the insured sued the insurer, alleging that the insurer’s breach of fiduciary duty resulted in the excess judgment. The court found that, under Mississippi law, an insurer must act in the best interests of the insured, but that an insurer is not required to accept an offer merely because it is within policy limits. Rather, when such an offer is made, an insurer has a duty to evaluate the claim and settle if the offer is objectively reasonable. The court held that no breach of the insurer’s duty could exist in this regard as the plaintiff never made a settlement offer.

The court next evaluated whether an insurer has a duty timely to offer to settle a claim which greatly exceeds the policy limits, absent an offer. The insured argued that the insurer had a duty to make the offer earlier because the claim greatly exceeded the policy limits. However, the court rejected the insured’s argument and held that Mississippi law does not place a duty on an insurer to make a settlement offer absent a settlement offer by a claimant.
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Federal Court in Oklahoma Holds “Other Insurance” Provision May be Enforced for Separate Policies on Truck and Trailer Driven Together
A federal court in Oklahoma granted summary judgment to an insurer, finding that the “other insurance” provision in its policies could be enforced to prevent stacking of limits for the insured’s tractor and trailer, each covered under separate policies issued by the same insurer. Shelter General Ins. Co. v. EarthSmart Const. Inc., 2015 WL 6672216 (N.D. Okla. Nov. 2, 2015).

The insurer issued two policies to an insured, one covering a tractor and the other a trailer, both owned by the insured. The insured was involved in an accident where the tractor/trailer rig caused two vehicles to run off the road, collide and catch fire. The insurer sought a declaration that stacking of the policy limits was improper as the policies were separate, each containing its own “other insurance” provisions providing: “If this coverage form and any other coverage form or policy issued to you by us … apply to the same ‘accident’, the aggregate maximum Limit of Insurance under all the coverage forms or policies shall not exceed the highest applicable Limit of Insurance under any one coverage form or policy.” The court found, under Oklahoma law, that “other insurance” provisions are enforceable against third parties seeking liability coverage. It further held that the payment of separate premiums was not relevant to enforcement of “other insurance” provisions against third parties and that stacking of the policies at issue might occur if there were a fact issue as to what damage was caused by the tractor versus the trailer, but that since it was clear that that was not the case, stacking was not permissible.
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Florida Appellate Court Finds Insured Not Entitled to Prejudgment Interest when Jury Determines the Amount of Loss on the Date the Verdict is Returned
A Florida appellate court recently held that an insured is not entitled to prejudgment interest when the amount of loss is determined at trial. Citizens Prop. Ins. Corp v. Alvarez, 2015 WL 6575711 (Fla. 2d DCA Oct. 30, 2015).

The insurer issued an all-risk homeowners’ policy to the insureds under which the insureds made a claim. The insurer denied the claim. The insureds filed a breach of contract suit, and the jury returned a verdict in favor of the insureds finding that the insurer did not meet its burden of proving that an excluded peril caused the damage. The trial court entered judgment in favor of the insureds, but denied the insureds’ request for prejudgment interest. The insureds appealed the prejudgment interest ruling.

On appeal, the insureds argued that they were entitled to prejudgment interest from a point prior to the verdict. The appellate court disagreed, noting that the claim for prejudgment interest was first raised with the trial court after the jury had returned its verdict. The appellate court concluded that because the jury instructions and the verdict form asked the jury to determine the amount of loss by establishing the cost to repair the damage, there was no evidence to support the position that the jury was determining the amount of the loss for a date other than the date of the verdict. Thus, the appellate court held that the jury resolved the dispute as to the cost of the repair and liquidated the claim as of the date of the verdict.
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Federal Court in Louisiana Finds Louisiana Law Applies to Texas Insured’s Claims Against Insurer Relating to Louisiana incident
A federal court in Louisiana has found that Louisiana law applies to a Texas company’s claims against its excess insurer relating to actions filed against the company for damages resulting from an incident on property in Louisiana. LeBlanc v. Texas Brine Co., LLC, 2015 WL 7451196 (E.D. La. Nov. 23, 2015).

Actions were filed against a Texas company for damages resulting from a sinkhole that developed on property in Louisiana. It sued its liability insurers seeking defense and indemnity and moved for summary judgment, urging the application of Louisiana law universally to all of its insurers. Its excess insurer cross-moved for summary judgment, seeking a ruling that Texas law applied to the company’s claims against it.

The court denied the insured’s motion for a choice of law ruling against all of its insurers but found that as to the excess insurer, whose policy contained no choice of law provision, Louisiana has the most significant relationship with the litigation and the most interest in having its law applied to the coverage dispute. Accordingly, it held that Louisiana law governs any dispute under the excess policy.
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Federal Court in Alabama Allowed Members of LLC to Intervene In Declaratory Judgment Action Against LLC
A federal court in Alabama has allowed members of a limited liability company to intervene in a declaratory judgment action filed against the limited liability company by its CGL insurer. Essex Ins. Co. v. J & J Cable Constr., LLC, 2015 WL 6872505 (M.D. Ala. Nov. 9, 2015).

A limited liability company was sued in state court by tenants of a residence served by a sewer line that became damaged while the limited liability company installed an electrical conduct. The limited liability company’s CGL insurer brought a declaratory judgment action to determine its rights and obligations relating to the underlying state court case.

The members of the limited liability company moved to intervene, alleging that as members of the limited liability company, they are insureds under a policy provision which states “[y]our members are also insureds, but only with respect to the conduct of your business.” The CGL insurer argued the movants had no interest in the declaratory judgment action because no claims were asserted against them in the underlying state court case. The court noted the movants seek to bring a claim for breach of the insurance contract as insureds and as third-party beneficiaries. The court found that the movants are named insureds under the policy and that the standard to intervene was met.
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Federal Court in Florida Finds No Coverage for Expenses to Achieve Aesthetic Uniformity in Absence of Continuous Run of an Item or Area
A federal court in Florida recently held that coverage for repairs for the purpose of achieving aesthetic uniformity is appropriate where repairs concern only an adjoining area for materials including wallpaper, baseboards, woodwork and carpeting. Great Am. Ins. Co. of New York v. Towers of Quayside No. 4 Condo. Ass’n, 2015 WL 6773870 (S.D. Fla. Nov. 5, 2015).

The insured submitted a claim for damage to its condominium building caused by a water leak from an air conditioning unit, which caused damage to drywall, carpeting, baseboards, insulation and wallpaper in the hallways of one wing of the building. The building maintained a uniform appearance by design with respect to the carpet, wallpaper and woodwork in the common area hallways, but the east hallway of the building was separated from the west hallway by a tiled elevator landing on each floor. The insured sought coverage to repair or replace the undamaged carpeting, wallpaper, baseboards and woodwork in the undamaged hallway in order to achieve aesthetic uniformity with the area that suffered water damage. The insurer denied coverage for the repair and replacement of components that were not physically damaged, and the insured sued for breach of contract. The insurer moved for summary judgment, requesting a declaration that the policy does not entitle the insured to coverage for replacement of undamaged building components to assure aesthetic uniformity, relying on the policy’s limitation of coverage to “direct physical loss” and explicit exclusion of coverage for consequential loss.

The district court granted the insurer’s motion in part, finding that coverage for matching for the purpose of achieving aesthetic uniformity is appropriate where repairs concern any continuous run of an item or adjoining area for materials such as wallpaper, baseboards, woodwork and carpeting, but that payment of the cost of matching that is not otherwise required is not covered under the policy.
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Federal Court in Florida Holds Liability Policy Covers Ongoing Damage to Defective and Non-Defective Property
A federal court in Florida held that a CGL policy provided coverage for the complete replacement of subcontractors’ defective work causing ongoing damage to non-defective property. Pavarani Construction Co. v. Ace Am. Ins. Co., 2015 WL 6555434 (S.D. Fla. Oct. 29, 2015).

The insured, a general contractor for a condominium project, filed a declaratory judgment action seeking an adjudication of the rights, duties, and obligations under its liability policy relative to a claim of defective work performed by two of the subcontractors that caused ongoing damage to non-defective property. The insured sought coverage for the replacement of both the defective work and the ensuing damage to the non-defective property. The insurer argued that the repairs were not covered by the policy because they remedied the subcontractors’ defective work, which was excluded under the subject policy.  

The district court granted the insured’s motion for summary judgment, finding that in order to repair the covered ongoing damage to the non-defective property it was necessary also to repair the subcontractors’ defective work. The district court found the policy provided coverage for repairs to both the defective and non-defective work.
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Federal Court in Florida Holds Appraisal is Appropriate to Resolve Dispute When Covered Peril Caused Some Damage
A federal court in Florida recently denied an insurer’s motion for summary judgment, finding that a dispute regarding the amount of loss is appropriately resolved through the appraisal process when an insurer acknowledges that a covered peril caused part of the damage to an insured’s property. Arvat Corp. v. Scottsdale Ins. Co., 2015 WL 6504587 (S.D. Fla. Oct. 28, 2015).

The insured brought a claim for damage as a result of a water pipe leak. The policy provided some coverage for water damage, but excluded coverage for damages caused by wear and tear, long-term decay and deterioration of building materials, as well as for settling, cracking, shrinking or expansion of building materials. The insurer accepted partial coverage and paid the insured’s covered damages (less the policy deductible), but denied coverage for the damages caused by wear and tear and/or deterioration. The insured filed a petition for declaratory relief and/or to compel appraisal. The insurer moved for summary judgment, arguing that the insured cannot force an appraisal when coverage has been partially denied.

The district court denied the motion, finding that the dispute involved solely the amount of damage caused by a covered peril as opposed to wear and tear and/or deterioration. The court held that an appraiser can resolve a dispute regarding the amount of covered damages, distinguishing those cases that hold appraisal is inappropriate when an insurer completely denies coverage. The court further stated that, if necessary, the court may resolve coverage issues based on the appraiser’s findings regarding the amount and cause of the loss.
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